16 April 2020

Many employers have faced significant frustrations in getting to grips with the government’s coronavirus job retention scheme (furlough scheme).

Employers have had to rely on regularly-updated government guidance, often vague in its terms and often inconsistent with previous government guidance. As such employers have had to implement the scheme as best they can per guidance at that time while awaiting more definitive rules.

The treasury has now issued a direction to HMRC instructing HMRC how to operate the scheme. Read here: Coronavirus Job Retention Scheme

This can now be treated as fairly definitive guide to the rules of the scheme. The direction is long, complex, and in some areas still unclear, but we do have clarity on a number of points. Some of these points are important and some of these differ from what was set out in previous guidance. We have addressed some of the main issues in this note. This is our understanding of matters at this stage but should not be treated as a definitive statement of the law or as legal advice.

What is a furloughed employee?

Furloughed staff must have been on the business’ books as at 19 March 2020 (not 28 February 2020 as previously stated)

A furloughed employee

• Has been instructed to cease all work and the furlough must have lasted (or will last) for at least 21 days
• Has agreed in writing (which can be by email) to cease all work. This is a new requirement.
• The cessation of work must be due to circumstances related to coronavirus.
• The furloughed employee cannot work for a connected employer or otherwise indirectly work for the employer. 

What about company directors?

Company directors can be furloughed and though they cannot work they can carry out very limited statutory duties – they can “fulfil a duty or other obligation arising by or under an Act of Parliament relating to the filing of company accounts or provision of other information relating to the administration of the director’s company”

What must an employer pay by way of furlough pay?

The employer must pay the employee £2500 per month, or at least 80% of “reference salary” if that is less than £2500 per month.

The calculation of reference salary based on the direction is disappointingly complex, and in our view is not clear.

The calculation depends on whether or not the employee is a “fixed rate employee”

Fixed rate employee –

You are a fixed rate employee if you get an annual salary to work X hours (basic hours), that salary is paid in equal instalments, and you are not paid anything else for working those basic hours. This is limited therefore to salaried, not hourly paid, staff. In terms of whether you are a fixed rate employee, it appears to be irrelevant whether overtime is paid for any hours over and above those basic hours.

Reference salary for fixed rate employees is simply the amount payable to the employee in the last payroll before 19 March 2020, but excluding anything that is not “regular wages or salary”.

Non fixed rate employee –

For employees who do not meet the definition of a fixed rate employee, reference salary is the higher of:

• Average remuneration in tax year 19/20
• Actual payment in the same pay period last year

But you must only include “regular salary/wages”. Regular means:

1. A payment which is contractually due
2. Wages not benefits
3. The payment must be “not conditional on anything”
4. The payment cannot vary according to
   a. Business performance
   b. Employee’s contribution
   c. Employee’s performance of duties
   d. Discretion
   Unless that variation arises from a legally enforceable agreement 

This is a remarkably complex definition and careful thought must be given to the calculation of reference salary for all those who are not fixed rate employees.

We would advise all employers to carefully consider the calculation of reference pay and ensure that this is being paid at the correct amounts. Expert advice should be taken.

What about employees who are off sick?

The direction deals, rather confusingly, with the issue of sick leave and SSP: If SSP is “liable to be paid” at the point the furlough would start, whether or not SSP has actually been paid/claimed, then furlough cannot begin until “the original SSP has ended” – does that mean the employee must regain health/exhaust SSP entitlement before they can be furloughed? That is our view but it is not clear.

Do we finally have clarity on holiday pay/annual leave?

No. The direction does not mention these matters! What is clear is that further government guidance will be required and that will be perilously close to 20 April 2020 when employers will be looking to start making claims to the HMRC.

Employment law

Caroline Carr, Partner: E: cac@bto.co.uk / T: 0141 225 5263
Laura Salmond, Partner: E: lis@bto.co.uk / T: 0141 225 5313
Douglas Strang, Senior Associate: E: dst@bto.co.uk / T: 0141 225 5271